What Is Credit Card Authorization, and How Does It Work?

With online and in-person card payments on the rise, it's becoming increasingly important to have the proper mechanisms in place to deliver the best possible experience to both merchant businesses and their customers. Over the years, the payment processing method has been perfected to achieve an equilibrium between security and convenience, and debit and credit card authorization have played a major role in the process.

We explore how card authorization works, where it stands in the payment process, the key stakeholders involved, and the benefits it carries. 

What is credit card authorization?

Credit card authorization is approval given by an issuer that a prospective customer has sufficient funds or credit available on their card to pay for the transaction that they wish to make.

This approval is generally granted after ensuring that the customer details are accurate and there are enough funds in their account. Upon confirmation, a credit card authorization hold takes place, and then the specified amount is deducted from the customer's account.

Debit card authorization and PayPal preauthorization also have similar payment approval processes since they operate on the same principle of online payments.

 

How does credit card authorization work?

The credit card authorization process typically involves four parties.

• The customer or buyer
• The merchant, that is, the seller
• The acquirer, aka acquiring bank (the bank that handles all the payments on behalf of the merchant)
• The credit or debit card issuer, aka issuing bank (the bank that's issued the customer's card)

First, the customer submits their card details to make a purchase. In response, the merchant sends a request to the payment processor or acquirer, such as payabl. The merchant acquirer then submits an authorization request to the cardholder's issuing bank, which then reviews the customer's account to confirm that the card is valid and sufficient funds are available for the transaction. If the check is positive, then a credit card authorization hold is placed on the customer's account, and the acquirer will receive a code of approval. This phase is called pre-authorization (often known alternatively as pre-auth, authorization hold, or auth-only). If the transaction is canceled or declined, an error code will be sent to the acquiring bank.

 

Exploring authorization holds in further detail

Here are a few frequently asked questions about authorization holds that might help you understand them even better.

What is an authorization hold?

An authorization hold, sometimes referred to as an authorization charge or pre authorization charge, is the process of holding or reserving funds for a certain transaction, which will then be captured from the cardholder's account. Some acquirers might capture the funds right after authorization, while others might take a few days. Generally, card authorizations expire after 5 to 10 days, so capturing and settling payments can't be delayed for too long. Also commonly referred to as pre-authorization, a merchant can use these holds to ensure that they get paid for specific transactions that are paid for via credit or debit cards.

 

At what stage of the card payment process do pre-authorization checks occur?

There are three main steps during the completion of credit or debit card payments.

1. The authorization phase
2. Payment capture
3. The settlement of the transaction

The pre-authorization check takes place during the first step. It does not involve a transfer of funds; it is merely the bank telling the merchant that adequate funds exist and the transaction can be completed. The card issuer creates an authorization key to protect the card information while it is transmitted between the parties involved in the transaction process. This authorization key (aka authorization code) consists of a maximum of six digits and is generated through a combination of transaction data and credit card information.

After authorization approval comes the capture phase, where the acquirer requests the issuer to release the funds. It's essentially a request for settlement, which is the final phase and end result of the entire authorization process. At this stage, the funds are actually transferred from the customer to the merchant.

What are all the possible bank responses to a merchant or payment processor requesting a pre-authorization?

When the cardholder details are transmitted to the issuing bank, the merchant can receive a number of responses relating to whether the customer's card can be used for the transaction. Here's a list of possible responses.

• Approved – The account is acceptable. In other words, there is no report that the card is lost or stolen and there are enough funds to cover the purchase.
• Partially approved - The account is acceptable, and the card has not been reported lost or stolen, but there could potentially not be enough funds to cover the purchase.
• Declined - The account is not approved. The card has either been reported lost or stolen, or there aren't sufficient funds to make the purchase.
• Referral - The bank is informing the merchant that there is a problem regarding the credit card number. The customer is required to contact the issuing bank to amend this.
• Incorrect PIN number - The transaction was rejected because the incorrect PIN was entered during the transaction process.
• Card expiration - The credit card has expired. The customer can attempt to enter the expiration date again or use a valid card.
• Pick up card - This bank directive is generally made after the transaction has been declined and the merchant has requested to retain the actual credit card. This could happen because of reports of the card being lost, stolen, or used for a fraudulent transaction or if the account is now closed.

Why is an authorization hold so important?

A credit card authorization hold or debit card authorization hold is very important in the payment process. By holding the transaction funds, merchants can prevent disputes as the transaction is not considered complete yet. The time needed to finalize the transaction can be used by merchants to validate the card using security checks.

Another reason that credit card authorization is vital during payments is to minimize refunds in the case of customer complaints, chargebacks, and such. Most merchants hold the transaction amount until they ship the product(s) purchased. This way they can simply release the hold and not issue a refund if a customer decides to cancel the order before the product's shipment.

How long do credit card pre authorizations last?

The card authorization time limit refers to the timeframe in which an approval response can be considered valid for a specific transaction. But how long does a credit card authorization last? There is no standard time limit or expiry date.

In some cases, a credit card authorization hold might be valid for 24 hours, 7 days, 31 days, and so on. The duration of the hold can vary depending on the four-digit Merchant Classification Code (MCC) and the transaction type.

The advantages of the card authorization process

We've identified three main advantages of going through the authorization process for debit and credit card transactions.

• Saves money and lowers costs - Credit card authorization prevents the need to issue refunds as the transaction amount is only on hold and not captured yet.
• Boosts customer satisfaction - Announcing to customers that their cards won't be charged until the items are shipped, for example, helps build trust and reduces cart abandonment risks. In case transactions do need to be reversed, it can take much less time than processing proper refunds, providing the customer with a better experience.
• Reduces the risk of chargebacks - As mentioned earlier, the sale amount is not immediately deducted when a credit card authorization hold is in place. This means that the customer cannot request a chargeback as they have not been charged yet. This also provides a window to identify and prevent potential fraud by checking if the card is valid and not stolen.
  
   

Contact payabl. today to discuss how pre-authorizations can work with your business model and how to utilize them as part of your risk management strategy for online card payments.